Category: FHA News

Welcome to the FHA news section of the Home Buying Institute. In recent years, the Department of Housing and Urban Development (HUD) has made many changes to their government-insured loan program. We publish a steady stream of FHA loan information, news and updates, to help you stay abreast of these changes.

FHA home loans are popular among home buyers for various reasons. The 3.5% down payment option is one of the most powerful lures. Eligible borrowers who use this government-backed lending program can put down as little as 3.5% of the purchase price or appraised value, whichever is less.

The relatively low down payment is a commonly known feature. But there’s another benefit many home buyers don’t realize. The Department of Housing and Urban Development (HUD) allows for the entire down payment to be a gift from a family member or other approved donor. This means the home buyer could obtain an FHA loan with no initial investment whatsoever.

In contrast, most conventional home loans require borrowers to use at least a portion of their own money for the down payment. They allow gifts from family members in some cases, but only for a certain percentage of the down payment. (The exact percentage varies from one lender to the next.)

With FHA, the Entire Down Payment Can Be a Gift

FHA down payment gifts from family are a major benefit for cash-strapped borrowers. It is partly what makes these loans so appealing to borrowers with limited funds.

Malcolm Hollensteiner, director of retail lending for TD Bank, recently explained these pros and cons to the Washington Post, in an article published on April 10, 2015.

According to Mr. Hollensteiner:

“If all of your down payment funds are a gift, then an FHA loan is your best choice. Because for a conventional loan, you need to have your own money for at least some of the down payment.”

FHAhandbook.com, an educational website for home buyers and mortgage shoppers, echoed this sentiment:

“With an FHA-insured home loan, the entire down payment can be gifted from a family member … most conventional [non-FHA] loans do not allow 100% gifting for the down-payment funds. This is another key benefit of the FHA program, one that appeals to first-time buyers in particular.”

So it seems that home buyers who plan to rely heavily on gifted funds would do well to consider the Federal Housing Administration’s loan program.

Other Acceptable Sources, Aside from Family

FHA allows down payment gifts from family members. But the gifted money doesn’t have to come from a relative. There are other acceptable sources as well. To get the skinny on this, you have to dig into the handbook. The official HUD handbook, that is.

FHA down payment gift rules and requirements can be found in Chapter 5, Section B of HUD Handbook 4155.1. This handbook can be found online, and it’s worth reading for anyone who is considering an FHA-insured mortgage loan.

Chapter 5 of this handbook provides a list of approved sources for down-payment funds. According to that chapter, an “outright gift of the cash investment is acceptable if the donor is” one of the following:

The borrower’s relative / family member

The borrower’s employer or labor union

A close friend who has a “clearly defined and documented interest” in the borrower

An approved charity organization

A public entity or government agency that offers assistance to (A) first-time home buyers or (B) families with low to moderate income

To learn more about FHA down payment gifts from family and other approved sources, refer to the official source mentioned above.

Gift Letters Are Required in All Cases

Think you can accept a down payment gift and be done with it? Not so fast. HUD also requires lenders to obtain gift letters from the donor, in all cases where third-party funds are being donated. But it doesn’t have to be anything fancy. It just has to state that the donor is truly gifting the money and does not expect to be repaid.

In other words, the gift letter must make it clear that the donor is not loaning money to the borrower, but giving it to them freely.

At a minimum, the gift letter must include (A) the name, address and phone number of the donor; (B) the dollar amount being donated; and (C) a statement that no repayment is required.

Note: Dozens of sample gift letters can be found online, with a quick Google search.

Some Lenders Require Bank Statements for Verification

In addition to the gift letter mentioned above, mortgage lenders usually request bank statements from the family member or donor who is providing the FHA down payment gift.

This requirement is also spelled out in the aforementioned HUD handbook. It states that the “lender must document the transfer of gift funds from the donor to the borrower.” This documentation is typically done with bank statements from the donor, though a cancelled check may suffice in some cases.

The bottom line here is that borrowers who use the FHA loan program do not have to cover the down payment expense out of their own pockets. The Department of Housing and Urban Development allows for 100% of the down payment to be a gift, as long as three conditions are met.

The gift must come from a family member or other approved source.

The donor must provide a gift letter that states no repayment is expected.

The transfer of gift funds from donor to borrower must be documented in some way.

Learn more: Borrowers interested in the FHA loan program can learn more about this topic from HUD Handbook 4155.1, which is available at HUD.gov.

An informal survey of more than 50 mortgage lenders has revealed the top three reasons for FHA loan rejection / denial in 2015. A bad credit score, excessive debt, and insufficient income are the three most common obstacles for mortgage borrowers seeking a government-insured home loan.

At the beginning of February, the Home Buying Institute began querying FHA-approved mortgage lenders across the United States to find out why potential borrowers were being turned away. The email survey was sent to several different types of lenders, all of which were approved to participate in the HUD 203(b) Mortgage Insurance program (more commonly referred to as the FHA loan program).

3 Biggest Reasons for FHA Loan Rejection or Denial

While there are many reasons why a person could be denied an FHA loan, the three most common factors identified in the survey were as follows:

The borrower’s credit score was too low, indicating an unacceptable level of risk.

The borrower carried too much debt already, relative to his or her income.

The borrower’s income was insufficient to take on the desired loan amount.

These factors are in no particular order. The survey was not designed to measure the frequency of denial within each specific category, but only to identify the most common hurdles faced by borrowers. Home buyers who are considering the FHA loan program in 2015 would do well to evaluate themselves in these three areas.

Of course, before you can evaluate yourself, you need to know how mortgage lenders will evaluate you. So let’s take a closer look at these three reasons for FHA rejection.

1. Borrower’s Credit Score is Too Low for FHA Loan

If you own a TV, you’ve probably heard about credit scores. Those ubiquitous commercials tell us how important these three-digit numbers are in our daily lives. This is half true. If you never rely on financing and tend to pay cash for almost everything, your credit score is meaningless to you. But if you use credit cards, home loans, and other forms of third-party financing, your credit score is a pretty big deal.

When it comes to the FHA loan program, there are a couple of numbers you need to know. According to the Department of Housing and Urban Development (HUD), which is the Federal Housing Administration’s parent organization, borrowers need a credit score of at least 500 to be eligible for the program. That’s tier one. Tier two is this: You’ll need a score of 580 or higher to enjoy the low 3.5% down-payment option that comes with FHA loans.

This doesn’t mean everyone with a score above 500 or higher will qualify for the program. Far from it. Mortgage lenders can impose their own credit standards as well, and their standards are often higher than the government’s. According to a previous survey we conducted, most lenders have a cutoff at around 580 – 620 for FHA borrowers. Many borrowers fall below these cutoffs, which makes this one of the most common reasons for FHA loan denial or rejection.

Note: These numbers are not set in stone. Some lenders are willing to go lower than others, where credit scores are concerned. Additionally, a borrower who is strong in other areas may be allowed to have a lower score. The bottom line is that it’s the lender’s call, ultimately.

2. Borrower Carries Too Much Debt Relative to Income

Pop quiz. What is your current debt-to-income ratio? If you haven’t a clue, you’re not alone. Most Americans (including myself) could not answer this question.

But if you’re planning to apply for an FHA-insured mortgage loan in the near future, you should find out where you stand. Excessive debt is one of the top-three reasons for FHA rejection in 2015, as it was last year as well.

According to HUD, borrowers can have a total debt-to-income ratio as high as 43% and still qualify for an FHA loan. HUD Handbook 4155.1 states that:

“The relationship of total [debt] obligations to income is considered acceptable if the total mortgage payment and all recurring monthly obligations do not exceed 43% of the gross effective income.”

They also allow for certain compensating factors, so that lenders can qualify borrowers with DTI ratios above 43% if they are well-qualified in other areas. So the 43% “rule” is not necessarily a deal breaker for all borrowers. Still, it’s one of the top-three reasons for FHA loan denial in 2015.

3. Borrower’s Income Is Too Low for a Home Loan

Your monthly income is the other side of the DTI equation mentioned above. Having too much debt in relation to your income can kill your chances of qualifying for a home loan. But having insufficient income relative to the loan amount is another common reason for FHA denial.

This is an offshoot of an item #2 above, but it can pose a problem all on its own. For instance, borrowers with little to no existing debt could still be turned down for an FHA loan if they lack sufficient income to cover their down payments.

You can file this one under ‘C’ for common sense. If you don’t make enough money to cover your monthly mortgage payments, you’ll probably get an FHA rejection from the lender.

Compensating Factors: An FHA Borrower’s Best Friend?

Earlier I mentioned the “compensating factors” HUD allows for borrowers with high debt ratios. In short, a compensating factor is something positive that makes up for something negative.

For example, a borrower with a debt-to-income ratio slightly above the 43% “soft” limit stated above might still be approved for the program, if he or she has a long history of making mortgage payments on time, and/or a lot of cash reserves in the bank.

Well-qualified borrowers don’t need to fret over such things. If you have excellent credit, very little debt, and a strong income and employment history, you have nothing to compensate for. FHA denial or rejection is less of a concern for such borrowers.

On the other hand, if you feel you’re a marginal borrower in some way (credit score is a little low, debt levels are a bit high, etc.), you should learn more about HUD’s compensating factors. They might be your saving grace in avoiding an unpleasant FHA denial.

FHA mortgage rates rose a bit this week, according to the latest survey conducted by Freddie Mac. But they’re still hovering at historic lows, well below the 4% mark. Borrowers with excellent credit are currently locking in 30-year rates as low as 3.55%. Here’s an update on FHA mortgage rates past and present, and with an eye to the future.

30-Year FHA Mortgage Rates Averaged 3.69% This Week

The average rate for a 30-year fixed mortgage fell to 3.69% this week, according to the long-running industry survey conducted by Freddie Mac. This average applies to both FHA and conventional home loans within the 30-year category.

The current rate averages in the 15-year fixed and the 5-year ARM categories are hovering just below 3%, and have been in that range for several weeks now.

So how do these current rate averages compared to last month, and to this time last year? Here’s a retrospective comparison:

Still Lower Than Last Month, and Last Year

FHA mortgage rates have come down a bit since the beginning of 2015, and they are significantly lower today than this time last year. This is the exact opposite of what Freddie Mac’s economists were predicting to happen last year at this time.

In December 2014, Freddie Mac’s chief economist Frank Nothaft published an article entitled “A Look Back at Five Predictions for 2014.” In it, he said the following:

“As we entered 2014, mortgage rates [in all loan categories] had been inching higher and were expected to continue gradually rising throughout 2014. What happened? Quite the opposite happened.”

Opposite indeed. Conventional and FHA mortgage rates actually dropped more or less consistently over the last 12 months. Sure, there were some isolated upticks here and there. But the overall trend was downward.

Consider the evidence. We started 2014 with the 30-year average loan rate at 4.53%. By the end of last year, the 30-year average had fallen to 3.87% — a drop of 66 basis points. Now, just a month and a half into 2015, FHA mortgage rates are even lower at 3.69% for a 30-year home loan.

A picture is worth a thousand words. Here’s a 12-month rate chart from the latest Freddie Mac survey that pretty much says it all.

This one-year chart starts at February 13, 2014 on the far left, and it goes to February 12, 2015 on the far right. You can see how rates fell pretty steadily over the last year or so.

The small upward blip on the far right is where we are right now. It shows what happened over the last ten days or so. From the week ending on February 6, 2014 to the week that just ended, the average rate for a 30-year mortgage (FHA or conventional) rose by 10 basis points, or 0.10%.

So here we are at the start of the year, and housing economists are once more making predictions related to long-term mortgage rates. And it’s basically déjà vu. Most analysts today are predicting a gradual rise in long-term interest rates between now and the end of the year.

Much has been written about the new mortgage rules that came onto the scene over the last couple of years. The Qualified Mortgage (QM) rule, for example, has generated thousands of headlines in the last year alone.

Many of our readers have asked how these industry changes will affect the FHA mortgage underwriting process in 2015. As it turns out, the new lending guidelines have had very little impact on the way FHA loans are underwritten.

Here’s why: The QM rule is designed to prevent risky lending practices that were never permitted under FHA underwriting standards. So it hasn’t really changed the underwriting process for these government-backed loans.

In December 2013, the Department of Housing and Urban Development (HUD) published a press release to clarify its stance on all of this. According to the release, HUD’s definition states that a QM mortgage loan must…

require periodic payments without risky features,

have loan terms no longer than 30 years,

limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (with exceptions for Title II Manufactured Housing and other special programs), and

be insured or guaranteed by FHA or HUD.

These stipulations apply to all single-family residential home loans that “HUD insures, guarantees or administers,” according to the corresponding entry in the Federal Register.

These requirements will not significantly alter the FHA underwriting process in 2015, because Federal Housing Administration loans have traditionally fallen within this mold.

As HUD explained in their December 2013, news release:

“Currently, HUD does not insure, guarantee or administer mortgages with risky features such as loans with excessively long terms (greater than 30 years), interest-only payments, or negative-amortization payments where the principal amount increases.”

Additionally, FHA underwriting guidelines already required mortgage lenders to assess the borrower’s ability to repay the debt. So there wasn’t much to change in 2014 or 2015.

Underwriting Process and Guidelines at a Glance

The FHA underwriting process is outlined in HUD Handbook 4155.1, Chapter 1, Section A. According to the handbook, the underwriter’s main responsibility is to “determine the borrower’s ability and willingness to repay a mortgage debt to limit the probability of default … and examine the property offered as security to determine if it is sufficient collateral.”

So the primary purpose of underwriting is to ensure that the borrower has the financial capacity to make the monthly mortgage payments. This is done by analyzing tax records, bank statements, pay stubs, and other financial documents.

Above all, the FHA underwriter must “make a reasonable and good-faith determination of the mortgagor’s [i.e., borrower’s] repayment ability at the time of consummation.” Verifying repayment ability is also the central theme of the QM rule.

Qualifying for a Loan

Generally speaking, borrowers must have:

A down payment of at least 3.5% of the purchase price or appraised value

Once the borrower’s file has been thoroughly reviewed, the underwriter will either approve it or reject it. He or she may also issue a “conditional approval” and give a list of conditions that have to be resolved before the loan can close. When the FHA underwriter is satisfied that both the borrower and the property meet the lender’s and HUD’s guidelines, the borrower is considered “clear to close.”

This is how the FHA underwriting process has worked for years, and it will remain this way in 2015 despite the new mortgage rules mentioned earlier. To learn more about this process, refer to Chapter 1 of HUD Handbook 4155.1, or visit our educational website at FHAhandbook.com.

Disclaimer: This article provides a quick overview of the FHA underwriting process in 2015. Mortgage underwriting is a complex and in-depth process that varies from one borrower to the next, due to the many different components involved. This article is not meant to be a comprehensive guide to FHA underwriting guidelines or requirements. The Department of Housing and Urban Development establishes all guidelines for this program. Visit www.HUD.gov to learn more.

At a glance: The FHA annual mortgage insurance premium for 2015 is being reduced. This change takes effect on January 26, 2015. The new annual MIP for most FHA borrowers will be 0.85% of the base loan amount. This change only applies to 30-year mortgages; 15-year loans are unaffected.

On January 8, the Department of Housing and Urban Development (HUD) announced they would reduce the annual mortgage insurance premium (MIP) that borrowers have to pay when using an FHA loan. This reversal follows a series of MIP increases made over the last few years.

This change only affects the annual premium for FHA-insured home loans. The upfront MIP was not changed for 2015. Additionally, these reductions only apply to 30-year mortgages (or, technically, anything “greater than 15 years”). This rate reduction does not apply to 15-year mortgage loans.

Bottom line: For 30-year mortgages with the standard minimum down payment of 3.5%, the FHA annual MIP rate was reduced from 1.35% of the loan balance to 0.85% of the balance.

Annual FHA Mortgage Insurance Premiums for 2015

The table below shows how the annual FHA mortgage insurance premiums are being reduced. The amounts shown in the “New MIP” column will apply to loans with case numbers assigned on or after January 26, 2015.

FHA Loans Greater Than 15 Years

Base Loan Amt.

LTV

Previous MIP

New MIP

≤$625,500

≤95.00%

130 bps (1.30%)

80 bps (0.80%)

≤$625,500

>95.00%

135 bps (1.35%)

85 bps (0.85%)

>$625,500

≤95.00%

150 bps (1.50%)

100 bps (1.00%)

>$625,500

>95.00%

155 bps (1.55%)

105 bps (1.05%)

FHA Loans Less Than or Equal to 15 Years

Base Loan Amt.

LTV

MIP

≤$625,500

≤90.00%

45 bps (0.45%)

≤$625,500

>90.00%

70 bps (0.70%)

>$625,500

≤78.00%

45 bps (0.45%)

>$625,500

78.01% – 90.00%

70 bps (0.70%)

>$625,500

>90.00%

95 bps (0.95%)

Again, these changes only affect the FHA annual mortgage insurance premiums for 2015, and only for loans greater than 15 years in length. The upfront premium (which borrowers are also required to pay) will remain at its current level of 1.75% of the base loan amount. Additionally, the MIP rates for 15-year loans will remain unchanged as shown in the table above.

These new rates were announced in HUD Mortgagee Letter 2015-01, published on January 9.

How to Read The MIP Tables

To make these numbers more accessible, we have split them into two tables. The first table shown above applies to FHA loans greater than 15 years in length (i.e., a standard 30-year mortgage). The second table applies to the 15-year home loan. So the first step in determining your annual FHA mortgage insurance premium is to find the appropriate table based on the length of your repayment term.

Next, you would need to find the relevant loan size. Most FHA borrowers will fall into the ≤$625,500 category, because the maximum FHA loan limit for a single-family home is $625,500.

Lastly, you would find the appropriate table row based on your LTV, or loan-to-value ratio. Most FHA borrowers fall into the ≥95.00% LTV category, because they choose the minimum 3.5% down payment. (This relatively low down payment is the primary advantage of using the FHA program in the first place.) Borrowers who put down 3.5% end up with an LTV of 96.5%, which puts them in the ≥95% category.

Example: For a 30-year FHA loan with a down payment of 3.5%, the new annual mortgage insurance premium would be 0.85% (after the change takes effect on January 26, 2015).

According to HUD, the lower annual MIP rates are expected to save more than two million homeowners an average of $900 annually. Additionally, the reduced premiums could spur 250,000 new home buyers to purchase their first house over the next three years.

Added Insurance: The Price You Pay for a Higher LTV

FHA isn’t the only type of home loan that requires extra insurance. Generally speaking, any time the loan-to-value ratio exceeds 80%, some form of mortgage insurance will be required. This insurance protects the lender — not the borrower.

In the case of FHA loans, the premium is paid to the government via the Federal Housing Administration. That’s partly how they fund their mortgage insurance program.Without these premiums, there would be no FHA program and therefore fewer loan options for borrowers.

With a conventional home loan, the mortgage insurance premium is paid to a third-party insurer in the private sector (though it usually gets “rolled” into the borrower’s monthly payment).

To avoid this added cost, the LTV ratio for any single loan must be kept at or below 80%. This can be accomplished by making a down payment of 20% or higher, or by combining two loans so that neither of them has an LTV higher than 80% (the so-called “piggyback” strategy).

Learn more: This article provides a basic overview of FHA annual mortgage insurance premium (MIP) rates for 2015. The MIP premiums for this program are set by the Department of Housing and Urban Development. To learn more about FHA loans and mortgage insurance, you can refer to the official HUD website at www.HUD.gov. To learn more about the reduced rates for 2015, do a Google search for “Mortgagee Letter 2015-01.” Additionally, lenders and borrowers can call the FHA Resource Center at 1-800-225-5342.

In December 2014, the Department of Housing and Urban Development (HUD) announced the 2015 FHA loan limits for California and the rest of the country. There were no major changes. For the most part, last year’s FHA lending limits will simply carry over to this year. Depending on where you live, this may be good or bad news due to average home prices.

High-cost areas: In counties with a relatively high median home price, the maximum loan size will remain the same as last year. The FHA mortgage limit for these high-cost areas is $625,500. This includes San Francisco, Los Angeles, and several cities within Orange County.

Lower-cost areas: According to HUD, the 2015 “standard loan limit for areas where housing costs are relatively low will also remain unchanged at $271,050.” Twelve California counties fall into this “lower-cost” category, including Del Norte, Kern and Imperial counties.

California FHA Loan Limits by County, 2015

Notes: The “1-family” column applies to standard, single-family homes. The “2-family” column applies to duplex-style properties that can accommodate two separate residents, and so on. FHA lending limits are assigned by county, which means all cities and towns within a particular county have the same caps.

Remember, these are the FHA loan limits for California. The amounts shown above specifically apply to mortgage loans that are insured by the Federal Housing Administration. There are separate lending limits for conforming conventional products (that are not insured by the federal government).

Some Counties More ‘FHA Friendly’ Than Others

For the most part, these are the same California FHA loan limits as last year. They were simply “rolled over” to 2015 with no major changes. Home prices, on the other hand, rose considerably in some California cities over the last year. As a result, a higher percentage of homes will exceed the maximum loan size for FHA.

For instance, the median home value in Orange County as of January 2015 was $626,000 (source: Zillow Home Value Index). The 2015 FHA loan limit for this county is slightly lower at $625,500, for the single-family category.

This means that more than half of all single-family properties are priced above the FHA mortgage cap, at least within the O.C. So many home buyers in this market will be shopping above the Federal Housing Administration’s lending limits. This is true for many cities and counties in California.

In other parts of the state, however, median and average house values are well within HUD’s guidelines for maximum loan size. For example, the median home price in Kern is $167,700. The 2015 FHA limit for Kern County, California is $271,050, more than $100,000 higher than the median house value.

So it would be fairly easy to find a home within FHA lending limits in this area — especially when compared to those higher-priced markets where the median is at or above the limit.

What’s the Best Type of Mortgage for You?

When choosing a type of mortgage loan, home buyers need to consider more than just the lending limits. There are other pros and cons that must be weighed as well.

For instance, the FHA program offers a down payment as low as 3.5% of the purchase price or the appraised value (whichever is less). This appeals to California home buyers who have limited cash saved up for a down payment. The downside to this financing method is that it requires two types of mortgage insurance, which can increase the monthly payments and the total amount paid over the long run.

We have several guides to help you compare these pros and cons. Start with this guide that explains the different types of mortgage financing.

Disclaimer: This 2015 California FHA loan limits shown above were exported from the “Mortgage Limits” database tool on the Department of Housing and Urban Development website. Their information is deemed reliable but not guaranteed. This information has been provided for educational purposes only. For the most current and accurate information available regarding loan amounts, visit HUD.gov.

The Department of Housing and Urban Development (HUD) announced today that the FHA loan limits for the current year will carry over into 2015 as well. They will not be lowered, as they were last year, but will instead remain at current levels through December 2015.

HUD made the announcement earlier today in the form of a press release and policy letter sent to lenders.

According to the news release issued today:

“FHA’s calculation for maximum loan limits in high-cost metropolitan areas of the country will remain the same as the 2014 level of $625,500. The current standard loan limit for areas where housing costs are relatively low will also remain unchanged at $271,050.”

At the end of each year, the Federal Housing Administration (FHA) revises the national loan limit assigned to FHA-insured home loans. They create their limits by using a percentage of the national conforming loan amount, which is established by the Federal Housing Finance Agency and applied through Fannie Mae and Freddie Mac. FHA typically sets their “floor” at 65% of the conforming limit.

In areas with higher median home prices, loans are allowed to exceed the floor. These counties are appropriately labeled as “high-cost areas.” In these housing markets, borrowers can obtain FHA loan financing in amounts up to 150% of the conforming limit.

2015 FHA Loan Limits Range from $271,050 – $625,500

According to current HUD guidelines, the minimum FHA loan limit “floor” for a one-unit residential property is $271,050 (65% of conforming). The maximum “ceiling” for high-cost areas is $625,500, equal to 150% of conforming.

This policy change (or lack thereof) was implemented with the publication of HUD Mortgagee Letter 2014-25, on December 5, 2014. The limits stated above will apply to FHA-insured home loans with case numbers assigned on or after January 1, 2015. This policy will remain in place through the end of next year, at which time the caps could be recalculated upward or downward.

The loan limits for FHA’s reverse mortgage product, known as the Home Equity Conversion Mortgage (HECM), will also remain unchanged in 2015.

To learn more about this loan program, read our recent update on HUD requirements.

Status Quo the Name of the Game?

Loan limits are not the only feature staying the same for 2015. HUD also plans to maintain their current requirements for down payments through 2015. Current credit score and debt ratio guidelines also appear to be carrying over to next year. Additionally, there have been no forthcoming changes announced for the mortgage insurance premiums assigned to all FHA loans.

This “status quo” is noteworthy, because HUD has made numerous changes to their loan program over the last few years. Most of the changes were designed to shore up the agency’s capital reserve fund and prevent future losses resulting from bad loans.

One thing is certain: First-time home buyers with limited funds will continue to flock to the FHA loan program, with its relatively small 3.5% down-payment requirement.

Coming Soon: FHA Single-Family Housing Policy Handbook 4000.1

In an effort to clarify its rules and policies, HUD has created a new handbook for mortgage lenders and borrowers. It explains the minimum guidelines and criteria for FHA loans.

The new handbook — the “Single Family Housing Policy Handbook 4000.1” — is currently available in draft form on the HUD.gov website. It will eventually replace HUD Handbook 4155.1, which has long been the go-to source for program guidelines.

The 2015 FHA loan limits will soon be added to the Single Family Housing Policy Handbook.

Summary: This article explains the 2015 limits for FHA seller concessions or contributions toward a buyer’s closing costs. It was updated and fact-checked at the time of publication, using HUD Handbook 4155.1, Chapter 2, Section A.

FHA loans are one of the most popular financing programs among home buyers today. They are especially popular among first-time buyers who have limited funds for a down payment and closing costs. Borrowers who use this program can enjoy the benefit of a low down payment, as little as 3.5% of the sale price.

Another benefit is that sellers are allowed to make contributions toward the buyer’s closing costs. Put simply, the seller involved in the transaction is allowed to chip in to help the home buyers pay some, or all, of their loan-related closing costs. In real estate lingo, this contribution is referred to as a “concession.”

But there are limits to how much the homeowner can contribute toward the borrower’s costs. In 2015, seller concessions will be limited to 6% of the sale price. This means the homeowner / seller can pay up to 6% toward the home buyer’s closing costs. Usually, this money comes from the proceeds of the sale. It’s important to note that this concession may not be applied to the down payment.

For more on this subject, let’s refer to the official source.

FHA Seller Concession Limits for 2015: Still at 6%

Seller contribution limits are established and enforced by the Department of Housing and Urban Development (HUD). It is HUD that manages the Federal Housing Administration’s mortgage insurance program.

“The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.”

You’ll note that this passage does not mention down payments. While borrowers can obtain down-payment gifts from family members and other approved sources, they cannot use a seller concession or contribution for the down payment. This is an important distinction, as well as a common point of confusion among home buyers.

Misinformation Regarding a 3% Cap on Contributions

A few years ago, HUD proposed a reduction in the seller concession limits for FHA-insured home loans. Specifically, they proposed cutting the 6% cap in half, thereby limiting sellers to a maximum closing-cost contribution of 3% in most cases. This proposed change was intended to help restore the agency’s capital reserve fund, which was severely depleted during the housing crash.

“After careful consideration of the issues raised by the commenters, HUD has decided to make the following changes to … reduce the amount of seller concessions permitted as offsets to actual closing costs to 3 percent or $6,000, whichever is greater…”

This proposal met with much resistance from mortgage lenders, realtor groups, and other housing advocates. They argued it would put homeownership out of reach for many of the very people the FHA program was designed to help (those with limited funds for closing costs).

So here we are at the end of 2014, and nothing has really changed. The proposal was put aside. Sellers are still allowed to help buyers pay some of their closing costs. In 2015, the maximum limit for FHA seller concessions will remain at 6% of the appraised value or sale price, whichever is less.

Many well-intentioned bloggers and publishers mistook the aforementioned proposal for an actual policy change, which it was not. As a result, there are now many articles online that claim there is a 3% / $6,000 cap on contributions. This is misinformation.

HUD officials could still follow through on their original proposal sometime in the future, lowering the cap to 3%. But for now, and for at least the first few months of 2015, the contribution cap will remain at 6% of appraisal or sale price.

Not Always a Viable Strategy

Just because you’re allowed to ask for a seller concession on an FHA loan doesn’t necessarily mean it’s a good idea. In a buyers’ market, where homeowners are eager to snatch up any offer they can get, you could get away with this type of strategy. But in a sellers’ market, where there is limited supply and high demand, it can be risky to ask for a contribution toward closing costs — or any type of seller concession, for that matter.

It begs the question: What type of market are we in right now? It varies from one region to the next. Some local markets are still experiencing inventory surpluses and low demand, which means buyers have more negotiating leverage. Other markets, like most major cities in California, have limited supply and high demand (i.e., a sellers’ market).

Home buyers should research local real estate conditions, and shape their buying strategy and offers with those conditions in mind. This is where an experienced real estate agent can prove helpful. An agent can tell you whether or not it’s a good idea to ask for a seller concession toward closing costs, based on local market conditions, pricing, and other factors.

Recap of key points:

Currently, in 2014, the maximum allowable seller concession for an FHA loan is 6% of the sale price or the appraised value, whichever is less. We expect this cap to remain in place for the first part of 2015, and possibly for the entire year.

During the course of your research, you might see some mention of a 3% limit or cap on seller-paid closing costs for FHA. That’s because the Department of Housing and Urban Development twice proposed a reduction in the maximum contribution — once in 2010, and again in 2012. These proposals met with fierce resistance and were essentially put on hold.

If you refer to HUD Handbook 4155.1, the official “rule book” for borrower eligibility and criteria, you’ll see that they still allow seller concessions of up to 6% going into 2015.

These contributed funds can be applied to the buyer’s closing costs, but not the down payment.

Disclaimer: This article explains how sellers can help pay a home buyer’s closing costs with an FHA seller concession. This information was updated and fact-checked on October 27, 2014. The Department of Housing and Urban Development frequently makes changes to their mortgage-insurance program. As a result, there is a possibility that this article may become outdated as the months go on. We encourage you to visit the official HUD website for the latest information regarding 2015 seller contributions, and other aspects of FHA financing.

It happens every year at this time. Right now, a lot of would-be home buyers are shelving their purchase plans until after the holidays. That means they are looking ahead to 2015, with an eye on mortgage rates, home prices, and lending standards.

To support these “over-the-horizon” buyers, the Home Buying Institute is publishing a series of updates for 2015. This update includes 2015 FHA loan requirements and guidelines, along with a 12-month rate forecast provided by Freddie Mac.

What Is an FHA Loan?

The FHA loan program remains one of the most popular financing options for home buyers, especially first-time buyers. But the rules of the game have changed over the last few years. In short, it has become harder to qualify for these loans, and the government is charging higher mortgage premiums than in the past.

We will get to the 2015 guidelines and requirements in a moment. But first, let’s answer a common question among first-time home buyers:

What is an FHA loan anyway?

FHA mortgage loans are insured by the federal government. The program is managed by the Federal Housing Administration and its parent organization, the Department of Housing and Urban Development (HUD). The Federal Housing Administration insures lenders against losses that may result from borrower default. This government-provided insurance is the primary difference between FHA and conventional or “regular” home loans (learn more).

Down payments are another FHA distinction. Borrowers who use this program can put as little as 3.5% down when buying a house.

These days, many of the banks and lenders that provide home loans in general offer FHA products as well. The program has become much more popular since the housing market crashed, though its popularity has waned a bit over the last two years. These loans are particularly popular among first-time buyers, due to the relatively small down payment mentioned above.

Here’s one thing borrowers should know about FHA loan requirements in 2015: Contrary to popular belief, they are not necessarily “easy” to obtain. That may have been true to some extent in the past. But it’s not anymore. Let’s discuss the reasons why…

FHA Changes: Not an ‘Easy’ Loan Anymore

There is a longstanding notion that FHA loans are easier to obtain, when compared to a “regular” conventional loan. This is due to the government insurance mentioned above.

There is some truth to this notion. Historically, borrowers who could not qualify for conventional financing have been able to use the FHA program as a last resort. The government backing makes lenders a bit more forgiving, when it comes to borrower qualifications and credentials.

But the qualification “gap” has narrowed over the last two or three years. The reason for this is that the Federal Housing Administration’s capital reserve fund (the money they are required to have on hand) took a huge hit during the housing crisis and subsequent recession. In fact, the FHA went into the red for a while, having no reserve funds at all.

In 2013, the usually self-sufficient agency required a taxpayer bailout of $1.7 billion to cover losses resulting from shaky loans made during the housing collapse. That was the first time in the agency’s 79-year history that it required taxpayer funding to stay afloat.

In the wake of those troubles, the Department of Housing and Urban Development made a series of FHA program changes designed to (A) bolster revenues and (B) reduce future losses. Among the changes were new credit-score rules for borrowers, higher insurance premiums, and reduced limits on maximum loan size. In short, the agency is now requiring higher standards for borrowers, and charging more for FHA loans. These rules will apply to borrowers in 2015 as well (see the guidelines section below).

2015 Guidelines and Requirements at a Glance

FHA guidelines and requirements for 2015 will be very similar to what they are now. No major changes have taken place over the last few months, and none have been announced for the months ahead. That doesn’t mean HUD won’t make additional program changes sometime during 2015. They certainly could. It just means we don’t anticipate anything new for the foreseeable future.

Here is an overview of FHA loan requirements and standards for 2015:

This program is open to all borrowers who meet the minimum eligibility requirements below. It is not limited to first-time buyers, contrary to popular belief.

All FHA borrowers are required to make a down payment of at least 3.5% of the sale price or the appraised value (whichever is less).

To qualify for the 3.5% down-payment option mentioned above, borrowers must have a credit score of 580 or higher.

Borrowers with a credit score between 500 and 579 must put at least 10% down, if they can get approved at all.

There are debt requirements as well, but these are a bit more lax when compared to the credit scores above. Generally speaking, a borrower’s total monthly debt load should account for no more than 43% of his or her monthly income.

HUD allows borrowers to have higher debt-to-income ratios if the lender can identify and document “significant compensating factors.” Such factors might include a long history of timely mortgage payments, excellent credit, or significant cash reserves. For a complete list of compensating factors for “high-debt” borrowers, refer to HUD Handbook 4155.1, Chapter 4, Section F.

Borrowers with credit scores below 620, and total debt-to-income (DTI) ratios above 43%, may encounter additional scrutiny during the application and approval process. Borrowers in this bracket may have to undergo manual underwriting. The underwriter will be looking for compensating factors to make up for the low-score / high-debt situation.

Lenders can impose their own guidelines on top of those promulgated by HUD. This is known as an “overlay.” So it’s possible for a borrower to be turned down due to a low credit score (for instance), even though the score meets HUD’s minimum cutoff. There are essentially two sets of requirements — the lender’s, and the government’s.

Note: This is a brief overview of 2015 FHA standards and guidelines. For more information on this subject, refer to FHAhandbook.com or HUD.gov. Additionally, there are exceptions and allowances to many of the requirements mentioned above. Borrowers should not assume they are unqualified based on one or more of these guidelines. The only way to know for sure is to apply for the program.

Mortgage Rate Forecast for 2015

This is the part where we gaze into our crystal ball to conjure an FHA mortgage rate forecast for 2015. Actually, I’m going to defer to a third party on this one. Here is a chart that shows Freddie Mac’s expectations for 30-year fixed mortgage rates, between now and the end of 2015.

Freddie Mac outlook for 30-year mortgage rates

Freddie Mac is the government-controlled corporation that buys and sells mortgage-backed securities. They have been running a weekly survey of lending rates since 1971. The chart above shows their economists’ “best guess” for rate changes over the next four quarters. This chart applies to both FHA and conventional (non-government-insured) products. So it could be viewed as a 2015 forecast for FHA loan rates as well.

If this forecast proves accurate, it means that borrowers should expect gradually rising interest rates between now and the end of next year. Not a spike by any means — but a motivator nonetheless. When you consider that home prices are also expected to rise next year in most U.S. cities, it sends a pretty strong signal to buyers. Postponing a purchase could cost you money.

Learn more: We have built a separate website for borrowers who are interested in this financing program. If you would like to learn more about FHA loan requirements and guidelines for 2015, visit FHAhandbook.com and download our e-book. It is available in PDF format at no cost whatsoever. The website also includes a Q&A blog with new articles added every week.

Disclaimer: The 2015 FHA rate forecast above is based on third-party data and estimations. This outlook does not necessarily reflect the views of the publisher. We make no claims or guarantees about future conditions within the mortgage industry or broader economy.

Summary: Home buyers who are considering an FHA-insured home loan can download our brand-new, consumer-friendly handbook. It explains the program in layman’s terms, and is available in a convenient PDF format at FHAhandbook.com.

Early in 2014, the publishers of the Home Buying Institute and QualifiedMortgage.org began offering an e-book about FHA loans. The 65-page book was written specifically for home buyers and borrowers, as opposed to mortgage lenders. Among other things, it explains some of the new rules and other changes made to the FHA program in recent years.

The latest version of the book is now available as a free download. Readers can download the handbook in PDF format by visiting the book’s official website: www.FHAhandbook.com.

FHA Loans Popular Among Home Buyers

The Federal Housing Administration, a division of HUD, insures mortgages originated by lenders in the private sector. This insurance protects the lender against default-related losses and makes FHA loans different from “regular” home loans. Among other benefits, the program allows for a down payment as low as 3.5%.

In the wake of the U.S. housing crisis, the FHA’s market share skyrocketed. In 2005, before the housing market collapsed, these government-backed loans accounted for only 5% of the purchase mortgage market, based on dollar volume. In 2012, that number shot up to 27%, a dramatic increase fueled in part by stricter requirements on the conventional side of the market.

FHA market share has declined a bit since then. But it is still one of the most popular financing tools among borrowers in 2014.

This program is especially popular among first-time home buyers with limited funds, due to the low down-payment option. The 3.5% down payment is what attracts most borrowers to this program in the first place, as shown by a 2010 survey conducted by the Home Buying Institute.

Many Changes Over the Last Two Years

There have been many changes to FHA rules and requirements over the last couple of years. These changes were primarily the result of financial losses suffered by the Federal Housing Administration in the wake of the housing crisis.

The end result is that it’s harder, and more expensive, to obtain an FHA-insured home loan today than it was in the past. That’s why it is so important for borrowers to have access to current information about the program.

The Home Buying Institute’s handbook is updated several times a year, as new information becomes available. As a result, it is one of the most current handbooks of its kind and a valuable resource for borrowers. But unlike the official handbooks on the HUD website, it is concise and easy to read. In just 65 pages, this book gives home buyers a solid overview of FHA loans. It explains the pros and cons of the program, minimum qualification guidelines, and all of the major rule changes that took effect in 2014.

The official handbooks published by the Department of Housing and Urban Development are written for lenders, and therefore contain a lot of information home buyers don’t need (such as document filing and coding instructions). The handbook available through FHAhandbook.com was written specifically for home buyers. It is concise, clearly written, and full of current information about the program. The book focuses on qualification criteria for borrowers, application procedures, and other topics relevant to borrowers.

Home Buyers, Mortgage Shoppers Can Download the Book for Free

In May 2014, the Home Buying Institute launched a new website where home buyers and mortgage shoppers can download the book. To download the FHA Loan Handbook in PDF format, visit www.FHAhandbook.com and click the “download” button. No registration is required.

Real estate agents, mortgage brokers, and other housing-related professionals are encouraged to link directly to the aforementioned website. That way, their readers will always have access to the most recent version of the book (as opposed to a static downloaded version that may be outdated). The most recent version is always available at FHAhandbook.com.

In addition to offering the free book, FHAhandbook.com also has a growing library of articles and tutorials for home buyers. New articles are added every week to keep readers informed.

Share the Book With Your Readers

We encourage you to share the FHA e-book with your blog or website readers. The best way to do this is by linking directly to FHAhandbook.com. If you download a static copy and offer it through your website, it will eventually become outdated and less useful to your readers. The book is updated several times a year to keep up with changes to the FHA program. The latest version is always available at FHAhandbook.com. That’s why we encourage you to link directly to the source.

You may link to the website however you wish. Here is some sample code you can use.

Disclaimer: The publishers of this website, and the author of this e-book, are not affiliated with the Federal Housing Administration, HUD, or any other government agency. We are independent housing researchers and writers. This handbook is not meant to replace the official FHA guidelines established by HUD. It is meant to complement those guidelines in a consumer-friendly way.